Welcome to the MacroBusiness Fund

Some of you will already know but let’s make it official. The MacroBusiness Fund is open for business. This is the culmination of a decade long dream for some at MB so congratulations all around.

Let’s begin with a description of what the fund is offering and how. There are six funds operating through the Linear platform using the world’s largest bank, J.P. Morgan as custodian. The fund is operated by Nucleus Wealth, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd (ABN 45 161 731 479) – AFS Licence No. 436298.

We have a considerable, experienced investment team assessing investment opportunities both at an asset allocation and at a stock selection level:

• Damien Klassen: Chief Investment Officer
• David Llewellyn-Smith: Chief Strategist
• Leith van Onselen, Chief Economist

Plus a global team of analysts examining companies.

These are not hedge funds. They are core investment funds that invest in Cash, Bonds, Australian Shares and International Shares, the idea being that they can form the core or nucleus of your investments and then you can invest in other assets (e.g. small caps, your own stock picks, hedge funds etc.) around these funds if you wish.

We have designed these funds to cut out your need for a financial planner who will charge a fortune for doing portfolio allocations, perhaps for doing very little for the privilege. We bring the group’s extensive macro insights to this task, also something your typical financial planner does not have. The MacroBusiness Fund charges only a 0.64% fee and the administration fee for the platform provider ranges from 0.25% to 0.55% (depending on how much you invest and where). If your needs are more complex and you still require more tailored planning advice then we can provide that too, or work with your current planner. The idea is that you only pay for advice when and if you need it.

There are six funds on offer:

Each is described below:

1. Tactical Growth, where we make the decision when and what mix to buy of Australian shares, International shares, cash or bonds. ($200k+)

• There is a higher weighting of growth investments (benchmark of 85% of the total assets of the model);
• Equities that have a higher susceptibility for volatility (whilst still conforming to the overarching quality and value requirements) will be included in this portfolio.
• Clients with a lower tolerance for risk can blend this model with other models to achieve a more appropriate risk outcome.

2. Tactical Accumulation, where we make the decision when and what mix to buy of Australian shares, International shares, cash or bonds. ($200k+)

• This is a conservative portfolio for investors who do not have an income requirement.
• The Tactical Accumulation Model is a multi asset tactical mix of Australian and International share portfolios, with defensive investments comprised of bonds and cash.
• There is a low weighting of growth investments (benchmark of 35% of the total assets of the model)
• Equities found through research to have a higher expected return will be included in this portfolio without regard to whether the return comes from dividends or share price growth (whilst still conforming to the overarching quality and value requirements).
• Using the tactical asset allocation noted above, this model operates in these asset classes using the ranges listed below.

3. Tactical Income, where we make the decision when and what mix to buy of Australian shares, International shares, cash or bonds. ($200k+)

• This is a conservative portfolio for investors who have a preference for income rather than capital gains.
• The Tactical Income Model is a multi asset tactical mix of Australian and International share portfolios, with defensive investments comprised of bonds and cash.
• There is a lower weighting of growth investments (benchmark of 20% of the total assets of the model)
• Equities found through research to have a higher susceptibility for dividends and distributions (whilst still conforming to the overarching quality and value requirements) will be included in this portfolio.
• Using the tactical asset allocation noted above, this model operates in these asset classes using the ranges listed below.

4. Tactical Foundation, where we make the decision when and what mix to buy of Australian shares, International shares, cash or bonds. ($35k+)

• The Tactical ‘Foundation’ model aims to provide investors with an introduction to the benefits of individual share ownership through a separately managed account, whilst still ensuring investors maintain a reasonable share parcel size.
• This model achieves this through an individual Australian share portfolio, a selection of International exchange traded funds, and defensive holdings in bonds and cash.
• Using the tactical asset allocation described above, this model operates in these asset classes using the ranges listed below.
• Note that from an asset allocation perspective, the Tactical Foundation Model is a combination of the Growth fund, the Tactical Income fund and the Tactical Accumulation fund.

5. Core Australian Shares.

• This is a “carve out” of the Australian part of the above portfolios.
• It is a core holding, designed to have exposure to the large capitalisation part of the Australian market.
• Its intended for investors who wish to do their own asset allocation, and can use this fund to get exposure to higher quality and cheaper stocks in the Australian market.
• Investors have the option to put an ethical overlay over this portfolio
• The minimum investment is $25k.
• This fund maintains minimal cash balances – i.e. the tactical funds above will reduce share weights when stock markets are expensive or risky, whereas this fund will remain fully invested. It is up to the investor to manage the asset allocation when buying this fund.

6. Core International Shares

• This is a “carve out” of the International part of the above portfolios.
• It is a core holding, designed to have a broad, diversified exposure to the world’s large capitalisation stocks.
• Its intended for investors who wish to do their own asset allocation, and can use this fund to get exposure to higher quality and cheaper stocks.
• Investors have the option to put an ethical overlay over this portfolio.
• The minimum investment is $70k.
• This fund maintains minimal cash balances – i.e. the tactical funds above will reduce share weights when stock markets are expensive or risky, whereas this fund will remain fully invested. It is up to the investor to manage the asset allocation when buying this fund.

Next, let’s discuss the investment process underpinning the funds:

We use a mix of Tactical Asset Allocation and Stock Selection Processes to provide investment outcomes for you. The diagram below highlights our investment selection process below:

Both local and international shares are then assessed on both a quality and value basis. These scores are plotted on an ‘investment universe’ map which is then used in the investment selection. The diagram below depicts this process.

The managed investment models are only available through the Linear Managed Accounts investment administration platform. These models are constructed, using the process outlined above, with the aim of providing various targeted objectives.

All positions are currently implemented through physical investments. The investment committee often takes a longer-term view on assets and will choose to gradually build positions with dividends/excess capital rather than actively trading where ever possible.

Third, here’s how these products will be delivered to you:

• Once you’ve been through our sign-up process, we will allocate you a risk/reward profile and apportion the above funds accordingly. Most clients will receive a “blend” of models. Unless you are interested in the share only options and take care of your own asset allocation.
• Each model is designed to help investors get access to the benefits and transparency of individual share investing, through the use of a separately managed account. You will always be able to see every security that you hold and it’s live value, contrary to the black box currently on offer in most managed funds:

• This granular approach offers you unprecedented ethical control. Once you’ve selected your fund mix, at the click of a mouse you can choose an individual ethical overlay for your portfolio. By choosing to exclude stocks your portfolio’s performance will differ from the standard portfolios. For example three categories are shown below:

Finally, where are the funds allocated today?

We see the following for the period ahead:

United States

An ongoing post-GFC recovery is building towards fullish employment. But it is not yet there and structural factors are weighing on wages growth. Inflation is chronically weak and low energy prices will keep it that way Thus we see the Fed tightening only slowly if faster than anybody else. The fiscal agenda has boosted stock valuations to high levels but a weaker USD in recent times has deflated that a little. Corporate margins are at historic highs and Trump agenda need only be modestly successful to given equities a boost.

The pilot fund was very long US equities entering 2017 and booked profits six times over H1. We are currently market weight but will buy any decent pullback.

Europe

The post-European recovery has enjoyed an acceleration this year but will slow next year. The continental economy cannot weather a higher currency. Inflation has rebounded strongly but is fading fast with oil. Unemployment remains huge and monetary tightening will be slow. Fiscal remains mired in the endemic problem of euro politics.

We’ve been long Europe in the pilot fund but have pulled that back now to market weight after booking a good profit. We are currently market weight.

China/Australia

China is set to slow in the next six months, especially in the commodity-intensive property sector. That slowing will be gradual and will not necessitate any further big ticket stimulus beyond the consistent roll out of infrastructure. We give the H2 National Congress a 60% chance of triggering further large scale reform which will slow China even further next year. When it takes growth too low then more stimulus will flow. So on and so forth as China steps down to the 4% range by 2020.

If there is a debt crisis we believe China has the resources to handle it without an outright crash. But it would badly effect all trading partners and still trigger global recession.

Thus we see Australia’s bulk commodity dependence as its Achilles heal. Australian corporate profits have a virtual one-to-one relationship with the terms of trade. As the latter falls with bulk commodity prices so will the former. That, in turn, threatens a ribald housing bubble.

Monetary policy is close to exhaustion. We see no rate hikes on the horizon and likely cuts as the dwelling boom rolls over in tandem with the terms of trade. Fiscal policy is constrained and the sovereign rating is in imminent peril.

We are very underweight Australian equities.

Equity/bonds/cash split

Given high valuations and recent monetary tightening we are currently a little underweight equities and bonds and have raised cash. We do not buy into the current round of global central bank excitement about reflation but accept that markets themselves may be overheated and the target of tightening. If the shakeout gets moving we will buy more bonds and, assuming there is a correction, more equities.

So, how do you join? Right now we are on-boarding the 1,400 or so investors that pre-registered for the fund. This will take us a week or two. If you are keen to invest then register today and we’ll get in touch very soon:

Alternatively, if would like to meet us in person, and get our full take on the evolving investment universe, we’re launching a national rock’n’roll thunder tour in September on the following dates:

There is $50 cover charge but it’s free for MB subscribers or fundies.

Thanks for your interest.